Tax Guidance for Mining, Oil, and Gas Drilling, and Extraction Businesses in California

Cook CPA Group

While California may be more closely associated with tech companies and entertainment firms in the popular consciousness, the state also boasts a sizeable mining, oil and gas drilling, and resource extraction sector. In fact, on an annual basis, the oil and gas industry contributes more than $20 billion in state and local taxes and more than $10 billion in federal taxes. The mining industry contributes additional significant tax revenues to local, state, and federal coffers.

More than 25,000 workers are involved in various resource extraction companies doing business in California. In addition to concerns regarding depreciation of capital, securing funding, and ensuring day-to-day cash flow oil and mining companies also have routine tax concerns. These routine tax concerns include annual tax filings, payroll tax obligations, and a proper handling of state sales and use tax obligations.

Most capital goods and equipment will depreciate with time. Depreciation is accounted for under the U.S. Tax Code which provides an annual allowance for the wear and tear, deterioration, or obsolescence of the property. Through a deduction for depreciation, a business can recover the cost or another basis of certain property. Generally, most property is eligible for depreciation including:

Buildings and structures

Capital goods

Machinery

Vehicles

Generators

Mining and other equipment

Certain types of intellectual property including patents, copyrights, and software.

While most businesses can benefit from this aspect of the U.S. Tax Code, companies in the heavy industry with significant property and equipment may benefit more than others. Businesses should consult with an accountant to determine if it can meet the requirements to claim depreciation. If so, the business may be able to free up significant cash flow and capital through tax-saving strategies to make further investments and to pursue additional business opportunities.

Federal Tax Credits for Oil and Gas Extraction Companies

In addition to depreciation as a means to save on taxes, mineral and resource extraction companies can often leverage several potentially tax-saving provisions of the U.S. Tax Code. Provisions of the tax code that oil, gas, and similar companies may be able to leverage include:

Tax deductions for the costs of good drilling – Most companies are able to deduct business expenses when filing their taxes. Oil and gas companies can take this a step further by leveraging 26 U.S.C. § 263(c) which will allow a company to deduct all or a significant portion of the intangible drilling costs upfront rather than over the life of the project.

Manufacturing tax deduction for domestic oil and gas production — 26 U.S.C. § 199 authorizes oil and gas producers in the United States to deduct 6 percent of the taxable income derived from qualified domestic production activities.

Tax deduction for marginal or depleted oil, gas, and shale oil deposits — 26 U.S.C. § 613A(c)(1) and 26 U.S.C. § 613(b)(2)(B) set forth tax breaks intended to permit certain resource extraction companies to recover costs associated with the depletion of the natural resource. Generally, qualifying companies can deduct 15 percent or more of the gross income from oil and gas produced from a well each year. The greatest tax benefit is reserved for marginal wells.

Tax deductions for tertiary recovery methods – Some oil and gas companies utilize tertiary injectants to recover additional oil from older wells. 26 U.S.C. § 193 authorizes oil and gas companies to deduct the costs of using these materials in the year where the expense was incurred rather than when the expense generates income.

Passive loss exceptions for oil and gas companies – Generally taxpayers are permitted to deduct passive losses – losses from economic activity and ventures where the taxpayer plays little active role – when filing their taxes. Typically, deductions may not exceed the passive income. However, 26 U.S.C. § 469(c)(3) permits oil and gas companies to use passive losses to reduce taxes on other types business income.

The above represents only some of the potential tax saving opportunities for oil and gas businesses. The accountants of the Cook CPA Group can assist with these and other aspects of business taxes.

CPAs can Assist with Balancing Your Books, Monitoring Cashflow, Tax Obligations and More

The accountants of the Cook CPA Group can provide trusted tax and financial guidance for oil, gas, mining, and resource extraction companies with corporate offices or field operations in California. From our Roseville accounting office, our CPAs and accountants can assess your firm’s finances and provide day-to-day guidance regarding cash flow and other aspects of your company’s bottom line. We can also provide tax guidance and handle a company’s quarterly or annual tax filings. To schedule a free consultation with a member of our accounting team, please call 916-432-2218.

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